stay connected facebook twitter YouTube LinkedIn
Forefront eNewsletter


Accounts Receivable Risk Management

Risk management is a very important part of any company's business model. Most people relate risk management to the safety of employees and customers. However, the concept can be applied across business units and departments as well. Business insurers rely heavily on actuarial data in order to make sure all elements of risk in the company are taken into consideration.

Accounts receivable administration also can apply risk management techniques to manage cash flow. Firms with thousands of clients can develop rating systems for each one and forecast projected cash flow based on the client's payment history. There is also external data that can be obtained from various organizations such as the Better Business Bureau and Dunn & Bradstreet to better understand the payment history of a client. Some potential clients may be determined to be too risky to be taken on, much like a lender refusing to do business with a borrower based on bad credit history.

It is certain that with accounts receivable, the sooner the outstanding balances are paid, the higher the likelihood of obtaining all of the funds owed. Thus, the monitoring of the aging of receivables is highly important. Accounts receivable departments can manage cash flow by prioritizing which clients need to be called first based on the age of the outstanding balance. Consideration is often also given to the balance amount. Many firms prefer to chase accounts receivable based on the highest balance owed; these clients would be called first in order to maximize receipts.

In manufacturing, the most technologically advanced companies use just-in-time processes in order to speed up the collections of monies owed. For example, there is a large manufacturing firm that orders parts and has them shipped to the factory from the vendors on the vendor's trucks. The trucks remain loaded until the exact moment the parts are needed. As the parts are unloaded, the barcode on the boxes are read and immediately entered into the accounts payable system. Simultaneously, the vendor's accounts receivable system is updated, and the aging starts. This makes for a very efficient system in order for both the manufacturer and the parts vendor to transfer cash from one to another.

In professional services firms, where billing is in the form of hourly rates, the fee earner will submit billing based on a certain percentage of total hours to be billed. For example, in a job that is to be billed based on a total number of estimated hours, the fee earner may be required to begin billing in increments of 25%. This allows the aging process to be pushed forward in order to reduce the aging effect on the total balance. This process reduces the risk of having large unpaid balances.

A good piece of collections software should be specifically designed to aid professional services firms in collecting receivables and improving risk management. It would have excellent reporting functions to help managers forecast cash receipts and help manage the work process flow of staff members. Such software is essential for professional services firms, as much efficiency can be gained with its use in reducing risk and, thus, increasing cash flow. The company in possession of and in practice of using such software will be in greater control of its resources and doing well in its industry.

MiniSoft, Inc.

MiniSoft, Inc. is a global software company specializing in collection management software for legal and professional service firms. They offer extensive reporting and trending capabilities, automatic business processing, seamless integration with Microsoft Outlook, and handling of multiple offices and currencies. Click here for more information.

Back to front page   |   Contact Forefront